The Chinese Communist Party poses the most comprehensive 21st century threat to the American nation, the American people and the American way of life. The first half of this century will be defined by how the United States meets the Chinese challenge across the full spectrum of economic, national security, geopolitical, and cultural issues. And an easily neglected aspect of our new great-power competition with our Far East archfoe now cries out for diligent and prompt attention: safeguarding the fruits of the nascent, but ascendant, cryptocurrency revolution.
Last month, China effectively banned all cryptocurrency trading and mining, which the Communist Party increasingly views as a threat to its planned “digital yuan” sovereign digital currency, which may be released as early as 2022. The People’s Bank of China, the Chinese central bank and Federal Reserve equivalent, barred international exchanges from providing cryptocurrency services to Chinese investors and speculators. It also banned financial institutions and digital exchanges from facilitating domestic crypto transactions.
China’s moves have further exacerbated already high volatility in the crypto markets, leading to intensified calls for the Securities and Exchange Commission to provide “regulatory clarity.” For instance, Senator Pat Toomey, (R-Pa.), an orthodox free marketeer, noted last month that in some recent crypto-related enforcement actions, “the SEC did not identify the securities involved or the rationale for their status as securities, which would have provided much-needed public regulatory clarity.”
The issue with extant SEC enforcement in the crypto space, as Toomey indicated, is its wildly inconsistent—and oftentimes outright punitive—nature to date. Crypto proponents contend that the only clear guidance from the SEC has been found through various one-off lawsuits. They point to the SEC’s ongoing case against Ripple Labs, a blockchain software company that uses the XRP cryptocurrency in cross-border payment settlements for banks. Ripple sought SEC guidance for years while billions of XRP tokens circulated, but never received any. In December 2020, the SEC then filed a $1.3 billion enforcement action alleging that every XRP sale since 2013 constituted an unregistered securities trade. That is not how due process of law is supposed to work in a well-functioning republic.
As the United States locks horns in a generation-defining struggle with China, and as the recent Chinese crackdown on cryptocurrencies opens the door for the United States to regain the global mantle on crypto innovation, it would be a mistake to simply continue on in the same way with the SEC’s peculiar brand of “regulatory clarity.”
The United States should support emerging technologies with the potential to add value to the economy, so long as those technologies are not detrimental to the national interest and the common good. The way to do that is not via inconsistent and incoherent regulatory enforcement based on whether a specific type of cryptocurrency is found to constitute an “investment contract” (i.e., security) under the Securities Act of 1933, according to the Supreme Court’s Howey Test from over 70 years ago.
SEC Chairman Gary Gensler has thus far unhelpfully stated that most cryptocurrencies are likely securities. That is insufficient guidance. Joe Biden is said to be weighing an executive order to direct agencies to craft clearer crypto regulations, but it is impossible to have any faith in doddering Uncle Joe’s ability to unilaterally help matters in such a novel area of the economy. An entirely new approach is needed.
One need not think very hard about where that new set of coherent legal guardrails ought to come from. “In republican government,” James Madison wrote in Federalist 51, “the legislative authority necessarily predominates.” And so it ought to be for crypto regulation in the year 2021, as well.
Congress urgently needs to step in and either force the SEC to provide actual, meaningful “regulatory clarity” for the entirety of the cryptocurrency industry, or to draft legislation. Such legislation would be a modern-day Securities Act update and would provide extremely clear guidance as to which forms of cryptocurrency—Bitcoin, Ether and so forth—constitute securities/”investment contracts” under the Securities Act of 1933 and which do not. The former category of securities would require SEC registration, whereas the latter category of commodities would fall under the Commodity Futures Trading Commission’s regulatory ambit.
Massive, economic paradigm-shifting industries require the most rudimentary of guidelines and categorical sorting to best channel their comprehensive societal value-add. This is simply not a partisan issue either. Just as the Securities Act of 1933 was needed in its day, so is a Securities Act of 2021 needed now. It’s time for Congress to get moving.
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